TAX incentives often damage developing countries’ economies by being “badly targeted, poorly managed, and granted without sufficient consideration”.
That is the central conclusion of Tax Incentives in the Global South, a “joint briefing” from Christian Aid, ActionAid, Oxfam, and the CBI, which was published on Thursday.
Tax incentives include tax breaks and relief to encourage companies to behave more responsibly and invest more. The report says: “We have focused on the issue of tax because — put plainly — many developing countries simply do not raise sufficient revenue to fund even the most basic services, like healthcare and education.
“If we are to achieve the ambitious Sustainable Development Goals (SDGs), then considerable new sources of finance need to be found, and this includes domestic tax revenue.”
It says that “the scale of corporate tax avoidance is considerable — whilst estimates and projections vary, the IMF suggests that it could cost developing counties some $200 billion annually”.
Furthermore, it says, “developing countries tend to rely disproportionately on corporate income taxes as a source of revenue. Therefore, corporate taxes (and corporate tax avoidance) are of much greater importance in the poorest parts of the world.
“The way developing countries tax companies is paramount, and tax incentives are an important piece of the puzzle. . . In the Global South particularly, inefficiency of tax incentives is all too common, with a multitude of incentives often granted across different government departments, with the resultant administration and monitoring costs outweighing any positive impact on revenue from raised investment.”
It gives the example of Burundi, one of the poorest countries in the world, where “at least 77 per cent of tax incentives were wholly unnecessary, thus depriving the country of much needed revenue.”
The report says that tax incentives are justified “when applied effectively and efficiently, and when resulting in outcomes that benefit the poorest”.
The CBI argues in the report: “Businesses want to get to a position where tax incentives work effectively for everyone, offering value for money and providing business certainty.”
Recommendations in the report include making incentives consistent with national economic policy; underpinning incentives with a transparent and clear legal and political process; granting incentives only after they have been properly assessed; subjecting them to ongoing monitoring; and ensuring that incentives are available to all similar companies on a level playing-field.